Since Title II of the Jumpstart Our Business Startups or JOBS Act passed Congress in 2012, equity crowdfunding has grown into a major investment trend. Title II permitted securities issuers to advertise unregistered securities offerings to the public through "general solicitation," provided investment is limited to accredited investors.
Title III will allow any investor to participate in equity crowdfunding offers to raise up to $1 million over a 12-month period. (The same offer may raise additional amounts from accredited investors.) A final rule for implementing Title III of the JOBS ACT is now scheduled to be published in October of 2015 and to take effect early in 2016.
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Aggregate annual investment limits will be imposed, based on the unaccredited investor's income and net worth. (Read more on Title III.)
Crowdfunding platforms that bring together unregistered securities issuers and investors are springing up like turnips, and a buzz of momentum is gathering behind the concept.
The pitch to investors is that anyone, with a small amount of money, can get in on the ground floor of the next Google of Facebook as a venture capitalist, and then reap vast profits when the company IPOs.
The equity crowdfunding concept has plenty of potential investment pain, in part because the general public lacks venture capitalists' due diligence expertise to vet small private companies. Also, crowdfunding platforms likely will attract con artists whose offerings could never pass muster with the transparency of SEC-registered offerings.
Financial advisors should be careful about participating in the crowdfunding hoopla.
In June, the SEC provided a warning shot for any advisors who might wish to hook clients up with equity crowdfunding portals for a finder's fee, without the approval of a broker-dealer.
In a consent judgment against two unregistered Florida brokers, the SEC reiterated that finder's fees in securities transactions may not be paid to individuals who are not broker-dealers or registered with one (read the PDF of the SEC order).
A few broker-dealers have ventured into unregistered securities by vetting and approving specific crowdfunding portals and deals. The compliance departments of these b-ds have full responsibility for conducting reasonable basis suitability reviews, making sure any investors in unregistered offerings are accredited, and supervising client-specific suitability issues.
They also will be required to supervise and document Title III requirements for unaccredited investor disclosures and income/asset limits.
Financial advisors who are not registered representatives should not accept finder's fees for linking clients with equity crowdfunding portals. Registered representatives should avoid going around their broker-dealer's procedures–i.e., "selling away"–to introduce investors to these portals for a fee.
It's okay to educate your clients about equity crowdfunding as a new investment concept. But if you charge clients fees, make sure your information is limited to generic education.
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